Also available online... www.j-sainsbury.co.uk/report2008 ANNUAL REPORT AND FINANCIAL STATEMENTS 2008 Annual Review Chairman’s statement 2 Business review 3 – Our business and its markets 3 – Corporate objectives 4 – Operating review 7 – Financial review 12 – Principal risks and uncertainties 17 Board of Directors 18 Operating Board 20 Governance Directors’ report 21 Statement of corporate governance 23 Remuneration report 27 Statement of Directors’ responsibilities 33 Financial Statements & additional information Independent auditors’ report to the members of J Sainsbury plc 34 Group income statement 35 Statements of recognised income and expense 36 Balance sheets 37 Cash fl ow statements 38 Notes to the fi nancial statements 39 Five year fi nancial record 86 Additional shareholder information 87 Financial calendar 89 Glossary 90 Notes Like-for-like sales: Like-for-like sales are Easter adjusted for comparative purposes. 2007/08 included two Good Friday trading weeks and one Easter Monday trading week. 2006/07 included one Good Friday trading week and one Easter Monday trading week. 2008/09 will include one Easter Monday trading week only. Underlying profi t before tax: Profi t before tax from continuing operations before any gain or loss on the sale of properties, impairment of goodwill, impairment of properties held within joint ventures, fi nancing fair value movements and one-off items that are material and infrequent in nature. In the current fi nancial year, these one-off items were the costs relating to approach from Delta Two, the costs associated with Offi ce of Fair Trading dairy inquiry and fair value gain on other fi nancial asset. In the prior fi nancial year, these one-off items were the profi t on part disposal of Sainsbury’s Bank and past service gains on defi ned benefi t schemes. Underlying basic earnings per share: Profi t after tax from continuing operations attributable to equity holders before any gain or loss on the sale of properties, impairment of goodwill, impairment of properties held within joint ventures, fi nancing fair value movements and one-off items that are material and infrequent in nature, divided by the weighted average number of ordinary shares in issue during the year, excluding those held by the ESOP trusts, which are treated as cancelled. MSGA sales: Are defi ned as retailing sales including VAT excluding fuel. £238 million was the Group’s underlying profi t before tax in 2004/05. Customer numbers: Are quoted on a consistent basis, but exclude the Bells and Jacksons convenience stores customers of approximately 1.3 million. Since March 2007 the Group has undertaken £2 billion of asset management activity. This includes two joint ventures, the acquisition of freeholds and the disposal of surplus and mature assets. This activity has not all been completed within the 2007/08 fi nancial year. Certain statements made in this announcement are forward-looking statements. Such statements are based on current expectations and are subject to a number of risks and uncertainties that could cause actual events or results to differ materially from any expected future events or results referred to in these forward-looking statements. Unless otherwise required by applicable law, regulation or accounting standard, we do not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future developments or otherwise. This year we decided to try something new. Sainsbury’s is delivering an illustrated review of the 2007/08 year online at its corporate website www.j-sainsbury.co.uk/illustratedreview rather than in print. This decision is in keeping with our corporate responsibility principle of ‘respect for our environment’. By providing information online we have signifi cantly reduced the amount of paper printed and distributed to shareholders. We hope you will agree that this is a change for the better. This annual report can also be accessed online at our website. With thanks to Anya Hindmarch, global social change movement ‘We Are What We Do’ (“WAWWD”) and Antidote for the inspiration for the cover of this report and our online review of the year. Sainsbury’s teamed up with Anya Hindmarch and WAWWD in April 2007 to launch the ‘I’m NOT a plastic bag’ re-usable shopping bag as part of its efforts to raise awareness of alternatives to disposable plastic bags. 20,000 bags sold out across the UK in under an hour. Sainsbury’s aims to halve the number of free one-use disposable plastic bags issued at its stores by April 2009. www.j-sainsbury.co.uk/illustratedreviewww.j-sains 1 Annual Report and Financial Statements 2008 J Sainsbury plc Chairman’s statement This year has been particularly signifi cant for Sainsbury’s since it marked the completion of the Making Sainsbury’s Great Again (“MSGA”) recovery plan announced in October 2004. The plan was based on improving our customer offer and operational effi ciency to achieve sustained improvement in our level of sales and profi t growth. I am happy to report that actual sales growth in the last three years exceeded our expectations with £2.7 billion additional sales by March 2008 against the original stretching target of £2.5 billion. This is a great achievement in a challenging market. Our sales growth is also refl ected in substantially improved profi ts. Our underlying profi t before tax for the year was up 28.4 per cent to £488 million, more than double the £238 million reported for the year to March 2005, prior to our recovery plan. The Board is recommending a fi nal dividend of 9.00 pence per share, making the full year dividend 12.00 pence, an increase of 23.1 per cent compared to last year. This is covered 1.63 times by earnings which is in line with our stated policy of dividend cover in the range of between 1.5 times and 1.75 times. It is a credit to the management team and colleagues at Sainsbury’s that our performance over the past 12 months was delivered against an extended backdrop of speculation concerning the potential take-over of the Company which lasted for the majority of 2007. In April 2007 a private equity consortium, led by CVC, decided not to proceed with plans to make an offer for the Company, as the pre-conditions to their fi nancing arrangements, which were outside the control of the Board, could not be satisfi ed. In November 2007, Delta Two’s plans to make an offer were also withdrawn following a fi nal review by them of their fi nancing plans. Throughout this period the business continued to perform, well refl ecting the exceptional leadership and commitment from the management team. We have also made progress in managing our property assets with the creation of two strategic joint ventures. These unlock the opportunity to develop stores signifi cantly and improve customers’ shopping experience and support our belief that effective property management is closely aligned to building shareholder value. We have a strong heritage and brand which is proving to be both resilient and increasingly relevant as consumers and shareholders are becoming more concerned with the social, environmental and ethical backdrop against which companies now have to operate. It is however, also evident that business conditions have become tougher in the last nine months as a result of the consumer slowdown now in evidence in the UK. The causes of the slowdown appear largely linked to the weaker prospects for economic growth in the light of the credit squeeze which gathered pace in the second half of 2007. The grocery retail sector is extremely competitive but the improvement in our performance in the last few years, together with 139 years of high quality and great value for customers, leaves us well placed to deal with these tougher conditions. The fi ndings published by the Competition Commission (“CC”) at the end of April 2008 brought its investigation to a conclusion. We welcomed its fi nding that the UK groceries market is ‘delivering a good deal for consumers’. This is consistent with the signifi cant improvements Sainsbury’s customers have experienced in product quality, availability, service and price over recent years. The CC recommended that a competition assessment should be introduced into the planning system. We argued for this for new stores throughout the inquiry to protect local markets from exploitation in the future. The CC also stated its intention to require more retailers to adhere to a new Grocery Suppliers’ Code of Practice, a proposal welcomed by Sainsbury’s. However, we believe the creation of an ombudsman to look into aspects of relationships between suppliers and grocery retailers is unnecessary. We will continue to play a full part in discussions with the CC and other parties, to ensure remedies are implemented in the most effective and effi cient way to improve choice for UK consumers. The OFT is currently investigating a possible competition infringement in the tobacco industry and also making early enquiries into the pricing of a number of other products sold by supermarkets. Sainsbury’s has strict guidelines for compliance with competition law and is cooperating with the OFT in each of its enquiries. In August we welcomed Mary Harris and Mike Coupe to the Board. Mary joined as a Non-Executive Director. She has previously spent much of her career with McKinsey, most recently as a partner, and has extensive strategic experience in consumer goods industries including retail. Mary will also be a member of Sainsbury’s Audit, Corporate Responsibility and Nomination Committees. Mike joined as Executive Director. He has been with Sainsbury’s since 2004 as trading director on our Operating Board.